Spurred by changes in consumer purchasing habits during the pandemic and the historic prices of home sales, the Long Beach City Council could be dealt a smaller budget deficit to balance next September than the originally projected $36 million shortfall.
While the city’s financial management team did not commit to a number Tuesday, it broadly agreed that when it comes back to the council in March 2022 with an update on the budget situation, the projected shortfall could be substantially smaller.
Long Beach was able to postpone the economic hit in 2021 because of a large infusion of federal and state COVID-19 recovery aid that saw the city receive nearly $250 million to help the local economy recover and assist in public health efforts like vaccinations and testing.
However, next year it will likely have to make cuts to balance its annual budget if outside aid stops. While there is optimism that the cuts could be less than $36 million by the time the budget is approved in September, the sheer size of the deficit could mean that cuts will be necessary even with a substantial shrinkage of the current shortfall.
“It is important to be cautious that the magnitude of the starting shortfall could still require some tough decisions,” said Grace Yoon, a budget manager for the city.
A big point of concern for the city could be the litigation over Measure M, a 2018 voter-approved tax on water and sewer services in the city, that an appellate court ruled against Long Beach last week.
Losing the Measure M revenue could mean a $9 million per year hit to the general fund, and potentially a $24 million one-time loss for revenue the city has already spent. However, the city intends to take the case to the California Supreme Court and a win there could free up some funds that the city would otherwise be forced to set aside if it lost the lawsuit.
Even with Measure M funds, the city’s annual budget consistently produces a long list of services and departments that are underfunded. The city will also have to simultaneously balance next year’s budget while negotiating new contracts with the city’s police, fire and lifeguard unions.
Two of the biggest reasons the shortfall could be smaller in the March 2022 update are property taxes and sales taxes, Long Beach Director of Financial Management Kevin Riper explained Tuesday.
Higher-end homes selling for higher prices have reset the amount of property taxes that the new owners will pay. The city receives about 21% of property taxes assessed to homeowners.
Riper also said that the pandemic caused a shift in consumer habits because closures forced them to pivot to buying more taxable goods, which could help bolster the city’s general fund.
“On net, the general fund is doing better,” Riper said.
Other sources of revenue like hotel and short-term rental taxes, parking citations and parks fees are performing worse but those funds are much smaller and less consequential to the city’s overall budget when compared to revenue collected from property and sales tax, cannabis sales and permit fees, which are trending up.
One change that could also shape the projected shortfall presented to the council in March is a change in philosophy from the financial management team. It had been working under a more conservative approach that often projected revenue figures that turned out to be much smaller than their actual year-end totals.
Riper, who was appointed earlier this year, said the team would be using a “reasonable expectation” approach going into this budget cycle.
Long Beach leaders seemed optimistic that the city could see a similar turnaround that other agencies are seeing including the state of California, which is now projecting a surplus of $31 billion surplus a year after projecting a $54 billion deficit.
“When you’re looking at sales tax especially, what this council should feel good about is that the number is going to be lower that the council is going to have to wrestle with,” Mayor Robert Garcia said.
The budget process typically starts in July with the release of the proposed budget that largely becomes the adopted budget in September. However, this year the city will begin meeting with the public in January to gauge its priorities for the upcoming budget.
Yoon said there are four public meetings that will be scheduled in January 2022 in addition to a survey that will be circulated to gather feedback from the community that will be bundled with a revised projection for the budget deficit that will be presented to the City Council in March.